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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Settlements legislation: settlor retains an interest - exceptions - outright gifts between spouses or civil partners

ITTOIA/S626

The rule that where the settlor has retained an interest in property in a settlement the income arising is treated as the settlor’s income for all tax purposes (TSEM4200) does not apply to an outright gift by one spouse or civil partner to another unless

  • the gift does not carry a right to the whole of the income or
  • the property given is wholly or substantially a right to income.

A gift is not an outright gift if

  • it is subject to conditions, or
  • there are any circumstances in which the property, or any related property

    • is payable to the giver
    • is applicable for the benefit of the giver, or
    • will, or may become, so payable or applicable.

Example 4 - outright gift

X owns a property that is let at a commercial rent to an unconnected third party. X transfers the property by outright gift to his spouse Y who then receives the rents. X has no further interest in or rights over the property. The rents that Y receives are not subject to the settlements legislation. They are Y’s income for tax purposes.

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Example 4a - no outright gift

The facts are as in example 4 but the gift is subject to an agreement under which X can require his spouse to return the property to him at a future date. This is a gift with conditions and there are circumstances in which the gifted property may return to the giver so it is not an outright gift. The rents that Y receives are subject to the settlements legislation. They are X’s income for tax purposes.

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Example 5 - outright gift wholly or substantially a right to income

An engineering company has 100 ordinary £1 shares. Mr P and Mr O own 50 ordinary shares each. They create a new class of B shares which carry no voting rights and no assets in a winding up. They then issue 50 B shares to each of their wives. Dividends voted on those B shares would be treated as the income of Mr P and Mr O rather than their wives as the B dividends are from shares that are wholly or substantially a right to income and so not exempted from ITTOIA/S624 by ITTOIAS626. (This example is based on the High Court case of Young v Pearce; Young v Scrutton (1996) STC 743).

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Example 6 outright gift not wholly or substantially a right to income

X is an IT consultant. He owns all the shares in a private company through which he sells his services. The company receives all the income he generates. The company’s only source of income is from work carried out by X. It has insignificant capital assets. X transfers his shares in the company to his wife by way of gift. His work in one year earns the company more than £70,000 but he decides to draw only £40,000 salary. This leaves £30,000 profit for the company. The company then pays a dividend of £30,000 to Mrs X. The arrangement effectively transfers part of X’s earnings to his wife. However, the House of Lords judgment in the case of Jones v Garnett confirmed that the focus of ITTOIA/S626 was the settled property. Regardless of the underlying arrangement the transfer of shares is an outright gift between spouses. Unlike the shares in example 5 above, the property gifted here is a holding of ordinary shares with rights to capital. The gift is not therefore of property which is wholly or substantially a right to income. The settlements legislation does not apply and we would not treat the dividend as the income of X.